Remarks by Ambassador Thomas S. Foley before the Deregulation Committee

Tokyo, Japan
February 2, 1999

(as prepared for delivery)

Chairman Miyauchi, members of the committee, let me first express my deep appreciation for this opportunity to address this body, which is engaged in the very important work of regulatory reform.

Let me begin by emphasizing the importance of the work that you are doing here. The success of Japan's efforts to deregulate its economy will have a far-reaching impact not only on the future of Japan, but also on the future of U.S.-Japan relations.

Over the past several years, Japan has committed tens of trillions of yen to stimulating its economy. This large-scale fiscal stimulus has been effective in supporting economic activity in Japan during this period of profound structural adjustment, but the key to ensuring sustained growth in the future is the acceleration of the structural reform process itself.

This means several things: It means adopting strong measures to bring the financial system back to health - including properly-conditioned bank recapitalization - and other measures to encourage financial institutions to return non-performing assets to the market at true market prices. It also means government measures to support and accelerate corporate restructuring, and the reorganization of relationships between firms along more competitive lines. It also means the introduction of a tough competition policy regime to stem anticompetitive practices, and a more transparent, rules-based government administration. Finally, and perhaps most importantly, it means drastic economic deregulation - to reduce government intervention in the market and in the allocation of resources throughout the economy, and to promote increased openness and market access for domestic and foreign firms alike. This last set of issues, of course, is the reason for the existence of your important committee.

Americans understand the benefits of market-opening regulatory reform. Nurturing competitive markets has boosted productivity, strengthened corporations, enhanced the standard of living of consumers, and - most importantly - created high-paying jobs and economic growth. The efforts of every Administration since President Carter have yielded impressive results. Deregulation of the telecommunications industry has increased jobs by 17% in just five years. Airline employment has jumped nearly 80% since deregulation began in the 1970s, and trucking has thrived in a competitive environment.

Of course, there is short-term pain involved in implementing these reforms. Regulation begets vested interests who fight hard to maintain their benefits. As a direct participant in this process in the U.S., I can appreciate the difficult task you have before you. But as a direct witness to the struggles, victories, and mistakes that characterized our decades of regulatory reform, I can attest that the results are worth the effort. I can also attest to the importance of political leadership in overcoming bureaucratic resistance in moving the deregulation agenda forward. This committee, given its mandate from the Prime Minister, can help play that role in countering this resistance.

In the past few weeks, I have sensed spreading sentiment in the Japanese government and political circles that "now is not the time to promote more deregulation." These voices seem to be saying that Japan should wait for the economy to recover to a stronger position before pushing forward with deregulation. Frankly speaking, I think this has got things backward.

Business and consumer confidence is critical to recovery. But confidence in the economy is not likely to be restored if investors and consumers feel the government is taking a defensive position toward employment and deregulation.

As a former politician, I can attest to the fact that what motivates voters, like investors and consumers, is their perception of what is coming in the future. By seeing continued concerted efforts in deregulation, investors and consumers can look forward with more confidence to new opportunities for investment and job creation. Strong political leadership displaying a willingness to tackle the fundamental structural problems facing Japan's economy is needed to restore that confidence.

It is well-known that America's current economic prosperity is due principally to our success in creating competitive markets. What may not be as well-known is that our deregulated economy has not created a cold impersonal world where the rich get richer and the poor poorer, but has helped support an economic explosion that has had a fundamental beneficial impact on society.

In fact, middle class America has never been stronger or more satisfied. Polling shows an unprecedented percentage of Americans believe they have never been more prosperous. Crime, out of wedlock births, teen sex, and drug use are all down significantly. Thus market-oriented regulatory reform and social harmony are not mutually inconsistent; in fact, in my country's experience they have been very much mutually supporting.

Our two countries are engaged in a bilateral effort under the Enhanced Initiative on Deregulation and Competition Policy to promote competition and open markets in Japan. This process last year resulted in agreements to deregulate Japan's market in several critical areas. As we now approach the end of the second year, we hope to build on that success.

We have reviewed the report this committee issued in December, and while we recognized several positive elements, we are hopeful you will be able to go much further over the next year in identifying more specific regulatory reform measures. As for the various interim deregulation reports issued by the government ministries last month, we see significant room for improvement in a number of areas before the March 31 revision to the three-year deregulation program is finalized.

Under the Enhanced Initiative we have proposed to the Japanese Government about 270 items we would like to see addressed. I understand you all have copies of our request list in Japanese.

I would like to talk about some of our requests for regulatory reform in Japan. In doing so, let me emphasize that these items do not represent priorities but only illustrative examples of the kinds of problems we would like to see the Japanese Government address.

In the area of telecommunications, Japan needs a regulatory system which is pro-competition, which encourages new entrants, and which safeguards against monopoly abuse by NTT. We note that this committee has called for more stringent rules on NTT DoCoMo interconnection rates. We strongly support your stance and look forward to the Ministry of Posts and Telecommunications taking your advice.

In the area of medical devices and pharmaceuticals, we have strongly recommended that Japan adopt a market-based pricing system to promote the introduction of innovative pharmaceuticals and have urged prompt and transparent procedures for creating new reimbursement categories for medical devices. We hope you will urge the Ministry of Health and Welfare to reconsider its plan to introduce a reference pricing system, since such a system would impede Japanese patients' access to the world's innovative pharmaceutical products.

In the area of financial services, we are encouraged by continued and timely implementation of reforms as spelled out under the Big Bang Deregulation Program. Continued progress in this area will result in a more competitive and healthy financial sector.

In the area of housing, our emphasis is on improved transparency in the reforms to the Building Standards Law; performance-based standards for wood-frame construction, building materials, and building systems; and a streamlined product approval and certification process. Japan needs to lower the cost of housing through deregulation in order to rescue its collapsing housing sector and improve the quality of life of its citizens. Increased housing construction and sales will also have a positive ripple effect throughout the economy.

In the area of energy, we have emphasized the need for market-led deregulation through structural reform, with a focus on easing burdensome standards, testing, certification, and information requirements under the Electric Utilities Industry Law and the High Pressure Gas Control Law. Japan has the highest energy costs of any OECD country due to the lack of competition, affecting the competitiveness of Japanese industries.

In the area of distribution, we commend the Ministry of International Trade and Industry?fs move to abolish the Large-Scale Retail Store Law. The new "location" law must be implemented in a manner that increases efficiency and stimulates small business activity. Japan should embrace retail distribution deregulation, which created a boom in small business generation in the U.S.

In the area of legal services, Japan's restructuring process - e.g. in the financial services sector - will be seriously impeded if the Ministry of Justice continues to thwart the development of a globally competitive legal services sector in Japan. That is why we are seeking a lifting of the ban on Japanese lawyers forming partnerships with or working for foreign lawyers.

In the area of transparency and other government practices, we commend the Management and Coordination Agency for its efforts to introduce government-wide notice and comment procedures at the beginning of the next fiscal year. In finalizing the plan, it is essential that the Agency close the various loopholes that would allow regulatory agencies and ministries to circumvent the use of notice and comment procedures.

In the area of competition policy, we seek an increased role for the JFTC (Japan Fair Trade Commission) as an advocate of regulatory reform; greater anti-cartel enforcement; and changes in the law to lift restrictions on private injunctive relief and private damage actions.

In closing, let me applaud you on the work you are doing here on this committee. I understand that you are all donating your time here, and you should be commended for your willingness to provide such a public service - particularly for doing so in what is an uphill climb.

Having participated myself in the deregulatory process in the United States, I am well aware of the type of opposition to reform that you are facing. I read in December where one of your members likened deregulation to an express train, with reform opponents trying to impede its progress by getting it to stop at their stations. Let me offer my encouragement to you all to keep the train running for the benefit of all Japanese and foreign stakeholders, be they consumers, businesses, workers, students, retirees on pensions, or government officials.

Thank you. 

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